Two weeks ago, I told you why a quick look at Colgate’s chart led me to believe that its run was going to continue through the early fall. And I also said that I had a few reasons to be wary of the stock’s ability to continue rising going forward.

If you’re a Dividend Superstars subscriber, you should have closed out that position based on my recommendation in the issue that just went to press. I’m tracking a gain of 32.7 percent. Great!

Now today I want to talk about a couple of the other things I look at on charts … and how they apply to some of the other investments that I’ve mentioned before here in Money and Markets.

Let’s start with …

The Importance of Support and Resistance:
Understanding Investors’ “Lines in the Sand”

Investors have a tendency to get hung up on certain numbers … quite often round ones. You know, like Dow 10,000.

I’m not a psychologist, so I’m not going to hypothesize on why it happens. But from many years of following the markets, I can tell you that it does happen with alarming regularity.

This is precisely why I pay close attention to clear levels of support and resistance whenever I look at any investment’s chart.

Let me explain with a real-world example …

Here’s a chart from Vanguard’s Inflation-Protected Securities fund (VIPSX), a good stand-in for the TIPS and I-Bond inflation hedges I’ve been regularly suggesting here and in Dividend Superstars …

In my past discussions of this particular fund, I pointed out that the low $12 level seemed very important psychologically to this particular investment. That’s because — as my trendline demonstrates — the fund had repeatedly bumped against this level before the credit crisis began … and again after the market rally started in 2009.

As you can see, once it recently broke through that level, it swiftly moved up another 4 percent. While that move might not sound huge, you have to remember that this is a mutual fund based on government bonds!

Are there fundamental reasons behind the move? Absolutely. Worries over a falling dollar and renewed inflation are obvious catalysts spurring investors to move into these hedging investments.

But that’s the point: These charts reflect the market’s collective thoughts and opinions. When events are enough to push an investment through a level that previously presented resistance … it means a certain critical mass has been achieved … and momentum quite often takes over from there.

Obviously the opposite is also true. When a level has previously held on countless downdrafts — forming a strong area of support — you better look out below the first time that level is seriously broken!

Now I’ll be the first to say that you never know when an important level is going to hold or not. However, simply being aware of critical breaking points — along with the fundamental reasons moving a market or an individual investment — will help you make more educated (and hopefully more profitable) decisions.

Of course, it never hurts to layer on one more relatively simple technical indicator that also measures levels of support and resistance …

Moving Averages: Another
Favorite Technical Analysis Tool

During my last analysis of Colgate in this column, I pointed to trendlines as a way to get a sense of an investment’s general direction.

Well, moving averages take trendlines to the next level because rather than being constructed somewhat arbitrarily (i.e. “pick a couple points that look important to you”), they are computed automatically based on a preset series of data. Specifically, a moving average is a line based on the arithmetic average of the prices it’s drawn against.

What’s the benefit? This way smoothes out all the little movements and creates a line that you can compare them to. Common moving average periods include 200-day, 90-day, and 60-day periods.

I like moving averages as another way to gauge general uptrends and downtrends, and to spot major market reversal points.

Speaking of which, here’s a chart of the S&P 500 with a 60-day moving average thrown in for good measure …

As you can see, the market is well above its moving average, and thus remains in an uptrend. Only a drop below the 1040 level would signal a change in that trend.

And perhaps the best part about technical analysis tools like moving averages is that they are no longer only available to professional investors with thousands of dollars in trading software. In fact, most online chart providers — including free websites like Yahoo Finance — now allow you to overlay these tools to whatever investment you’re viewing.

If you don’t already use these indicators, I encourage you to play around with them … they can give you another interesting way of viewing your investments.

Best wishes,

Nilus

P.S. In addition to that Colgate sell order, my latest Dividend Superstars issue also contained a brand-new dividend stock to buy (in the tech sector no less!). If you’re not yet a subscriber, and you’d like to get that hot-off-the-press recommendation, consider taking a risk-free subscription to my service for just $69 a year.

——————————————————————————–

About Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

First of all Options are derivatives of something. That means an Option gains its value from some underlying instrument that has value. In the case of options trading the underlying instrument are stocks, commodities, futures contracts, foreign currencies, or stock indexes. So the options contracts would base its value on the values of whatever instrument you want to trade.

Now remember all an option is a contract between a buyer and a seller. In a contract both parties have to agree upon certain things. One of the first things that the two parties need to agree upon is the strike price. Simply put the strike price is the price in an options contract at which the underlying instrument is bought of sold if the options is exercised. So the buyer of the options contract reserves the right to purchase or sell the underlying instrument for a specified price or strike price. Think of it as the price you are locking in for a premium.

The premium is the amount of money you are going to pay to lock in the strike price of the option. In other words, for a call option, I lock in the option to buy the underlying instrument for a certain strike price by a certain date. You will receive a premium for holding that stock for me until the option expires or ends.

Take for example I believe the value of your house is going to increase from its’ current value of $100,000 to $200,000 because there is a new sub-division coming in that you might not know about. I am going to pay you $10,000 right now for you to hold the house for me for three more months. By the end of three months, if I choose to, I will pay you $150,000 for your house. You just bought the house for $75,000, so hey you are getting to double the amount of money, so for this example you agree. Now remember no matter what you get to keep the $10,000 premium. So even if I decide not to buy your house for $150,000 you keep the $10,000. If I find someone willing to pay $200,000 for the house I will exercise my rights to purchase the house from you for $150,000. You would have made a profit of $85,000 from when you bought the house and my investment of $10,000 would gain me $40,000.

The expiration date, on options, is the date at which the options contract has to be exercised by or else it expires worthless. In the previous example I would only have 3 months to find a buyer willing to pay $200,000 before I would profit. The expiration date for most options is the third Friday of the expiration month specified on the contract. Because the markets close on Friday, technically speaking Saturday is when they officially expire, but that is only for trade clearing and resolution of errors. You could not contact your broker on Saturday and tell them you wanted to exercise your option rights.

Get more free information on trading stock options with this free basics video course.

Michael
http://www.smartradenews.com
We offer a free basics video course to teach you the basics of options. We have more advanced courses for a fee. So whether you are just starting out or if you want to continue your options education we have something for you.

Article Source: http://EzineArticles.com/?expert=Michael_A._McIntosh